Insights

Failure to conform to the CBCA does not itself trigger oppression remedy

Mr. Mennillo and Mr. Rosati together began Intramodal Inc., a transportation business, in 2004. Mr. Mennillo advanced substantial amounts of money to the
corporation and received 49 of 100 shares, the balance of the shares being held by Mr. Rosati who managed the corporation.

From the very beginning, the corporation rarely had written governance records and largely failed to comply with the requirements of the Canada Business Corporations Act (the “CBCA”). In 2005, Mr. Mennillo considered that he was not receiving a fair return on his investment
in the corporation and resigned as officer and director. While Mr. Mennillo claimed he wished to remain a shareholder at that point, his shares were
transferred to Mr. Rosati. The transaction was done without properly following the CBCA provisions regarding share transfers.

At trial, however, the judge found that the share transaction was nevertheless at the express request of Mr. Mennillo, and that Mr. Mennillo had undertaken
to remain a shareholder of the corporation only so long as he was willing to guarantee the corporation’s debts. As his contributions had been paid back and
he was no longer willing to guarantee the corporation’s debts, he had ceased to be a shareholder. Mr. Mennillo appealed the ruling. A majority decision of
the Quebec Court of Appeal dismissed the appeal and Mr. Mennillo further appealed to the Supreme Court of Canada.

The Supreme Court in a 6-1 decision upheld the trial and Court of Appeal rulings. The test for oppression required Mr. Mennillo to show “(1) a reasonable
expectation that the corporation would treat him in a certain way; and (2) that the corporation breached that reasonable expectation” (para 84). However,
the fact that the corporation did not follow the requirements of the CBCA was not sufficient to show a breach of reasonable expectation. In the
case at hand, Mr. Mennillo did not have a reasonable expectation of remaining a shareholder, and despite the corporation’s failure to ensure legal
formalities, it had acted according to Mr. Mennillo’s wishes.

The Court concluded that conduct which does not conform to the CBCA is not itself sufficient to trigger an oppression remedy; instead, the conduct
must explicitly frustrate reasonable expectations.

This has implications for both minority and majority shareholders in the corporate context and how they interact with one another. While parts of the CBCA
and its analogous provincial statutes serve to protect shareholders, it may not provide any recourse where the minority shareholder simply relies on the
rules not having been followed. Situations where majority and minority shareholders have had a falling out inherently involve some uncertainty. In this
context, timely and knowledgeable legal advice is an important tool to mitigate risk.